Understanding The LIBOR Scandal

It appears that the Libor-rigging scandal involving Barclays only leads further down the rabbit hole. What exactly happened, and why is it such a big deal? First, it’s important to understand what the Libor is, and how it was rigged.

Libor is an acronym that stands for “London Interbank Offered Rate”, which is the rate at which banks borrow from each other. Banks submit their own interest rate, and Thompson Reuters, on behalf of British Bankers’ Association, publishes a trimmed average of all of the rates. Basically, when the Libor is high, it shows a lack of confidence the banks have in each other, which means they could have troubled financial health. A large percentage of the world’s variable-rate investments rely on the Libor.

So how was it rigged? If banks were doing poorly, but wanted to make themselves look better, they would raise the rate they submit. With the amount of financial products relying on the rate, trillions of dollars would be affected.

What did Barclays do then? They artificially lowered their interest rate submission to make the industry as a whole look stronger. Normally, Barclays’ rate was higher than most other banks because they were reporting the real numbers, while all of the other banks were lying, according to their former CEO.

This is the scary part: an email from October 29, 2008 was released outlining a conversation between former Barclays CEO Bob Diamond and the Bank of England deputy governor Paul Tucker. The email was Diamond’s explanation to his Chairman and COO that Tucker encouraged him to rig the Libor lower by lowering their submitted rates.

Even scarier, Diamond’s email implies that Tucker was only relaying orders from senior members of the British government, and that their goal was to maintain an appearance of the country’s financial stability. Right now, it is only Diamond’s word that this occurrence is true, but if it is, then it implies that all other banks were leading the manipulation scandal, and that Barclays was the last to oblige.

Business Section: Investing Ideas

What does this mean for you? Well, since so many financial products are based on the Libor, they will all likely be affected. If the Libor was manipulated to convey a safer or stronger financial industry, then the industry could become much more volatile.

Bank stocks and many other financial instruments could become much riskier, and we could see panic across entire markets.

Below is a list of bank stocks that could be affected the most. How do you think they will react to the scandal?
List sorted by market cap.

1. HSBC Holdings plc (HBC, Earnings, Analysts, Financials): Provides various banking and financial products and services. Market cap at $174.28B, most recent closing price at $43.89.

2. UBS AG (UBS, Earnings, Analysts, Financials): Provides wealth management, asset management, and investment banking products and services to private, corporate, and institutional clients worldwide. Market cap at $41.61B, most recent closing price at $11.02.

3. The Royal Bank of Scotland Group plc (RBS, Earnings, Analysts, Financials): Offers banking and financial services to personal, commercial, corporate, and institutional customers in the United Kingdom, the United States, and internationally. Market cap at $34.66B, most recent closing price at $6.27.

4. Barclays PLC (BCS, Earnings, Analysts, Financials): Provides various financial products and services in Europe, the United States, Africa, and Asia. Market cap at $31.31B, most recent closing price at $10.27.

5. Deutsche Bank AG (DB, Earnings, Analysts, Financials): Provides investment, financial, and related products and services. Market cap at $31.04B, most recent closing price at $33.65.

(Written by Danny Guttridge)

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